California Real Estate Practice Exam

Potential gross income minus a vacancy and collection loss is _______.

1. Net income

2. Operating income

3. Effective gross income

4. Gross rent multiplier

The correct answer is: Effective gross income

Potential gross income (PGI) is the total possible income a property can generate, assuming it is fully occupied and all rent is collected. However, due to vacancy (unoccupied units) and collection loss (unpaid rent), the actual income received will be lower than PGI. Option A, net income, is the income after all expenses (including vacancy and collection loss) have been subtracted from total income. Option B, operating income, is the income after all necessary operating expenses have been subtracted from total income, but it does not take into account vacancy and collection loss. Option D, gross rent multiplier, is a valuation tool used to compare the price of a property to its potential income, but it does not include vacancy and collection loss in its calculation. Therefore, the correct answer is C, effective gross income, which is the income received after deducting vacancy and collection loss from PGI. This figure gives a more accurate representation of the property's income potential.